Reversal of reversal: Momentum back in vogue
The reversals seen in April were largely undone in May as Momentum and Growth
led once again, and Risk and Value lagged. The top five factors last month were all
Momentum strategies, with returns ranging from 4% to 5%. Momentum factors
closed the YTD performance gap with Growth, coming in second place year to date.
Growth stocks continue to work; quality mixed
All of the growth factors we track beat the benchmark in May, with Upward Estimate
Revisions (+2.7%) faring best. So far in 2015, Quality factors (High ROA, High
ROE, High ROC) were mixed with returns ranging from -0.3% to +1.1%.
Risk and value lag, with Energy largely to blame
Weakness in the Energy sector last month weighed on attributes correlated with
Energy stocks –value and risk. Value underperformed, owing partly to these factors’
high exposure to Energy stocks, with Low EV/EBITDA and Low Price / Cash Flow
finishing among the bottom five. High EPS Estimate Dispersion (-6.7%), a risk factor,
posted the weakest returns in May, also attributable to Energy where a wider range of
crude forecasts has driven up dispersion of EPS estimates.
High Beta may be the best summer rental
With the sell-off in riskier stocks for most of this year, High Beta stocks are now
trading at a record discount to their Low Beta counterparts. History suggests High
Beta might perform quite well from here relative to low beta. Since 1986, valuations at
similar extremes were followed by High Beta beating Low Beta by over 11ppt on
average in the subsequent three months. See page 45 for a High Beta screen.
Strong dollar shrugged off, Foreign Exposure leads YTD
Stocks of companies with a high proportion of overseas sales (Foreign Exposure)
saw a second month of outperformance after lagging in 1Q amid dollar strength.
High Foreign Exposure now leads the index with a +2.6% return year-to-date.
Divvy growth led, high yield lagged last month
Rates volatility may have weighed on High Dividend Yield (-1.0%), while the less
rate-sensitive Dividend Growth (+2.2%) handily beat the index. With economic data
on the mend, and the Fed slated to hike rates in 2H15, we prefer Dividend Growth
to Dividend Yield, as the latter tends to lag as rates rise.